Cookie-cutter Credit Cards? The Complexity of Credit Card Launches

Shawn

Hello, This is Shawn Budde, of Ensemblex, and this is the Ensemblex Exchange Podcast. Today we're going to be talking about some of the challenges in launching a credit card business. That includes when you might want to use a BAAS, that's Banking as a Service, B -A -A -S. And joining me today is Scott Bass from Ensemblex, and that's B -A -S -S.

So, Scott is a member of our team. He joined us about three years ago. So welcome, Scott.

Scott

Thanks, it's great to be here.

Shawn

Alright, can you just take a minute before we get started to walk us through your background?

Scott

Sure, yeah. I've been in financial services about 25 years. The first seven of those was at Capital One in various kinds of operational leadership roles. For those listening, that's in fact when I met Shawn back then, and we've known each other ever since. Since then, I went on to co -found a prepaid card program that in today's parlance would be called a FinTech, but back then that term didn't exist, where we offer prepaid cards to consumers. That was kind of an early precursor to what you see now as NeoBanks or Challenger Banks. From there, I ended up through a merger and acquisition, ended up working for Green Dot for a couple of years and was a leader in their supply chain area. And my team mailed out about 15 million debit cards over that time. And from there ended up as one of the founding members of the US team that launched the Monzo product in the US.

So Monzo is a very successful neo bank in the UK and they're working on building a business here in the US. And then from there, joined the Ensemblex team and I lead the product launch area where we help folks build and launch new lending products.

Shawn

You joined us specifically because we had the opportunity to launch a new consumer credit card program in the United States. As you mentioned, you've also worked on debit card programs, and you've helped to adapt some of the international products to the US. So why don't we start by having you just tell me, what does it take to get an idea like this off the ground?

Scott

Yeah. So, you know, there's a lot of moving parts that need to be pulled together in order to launch one of these types of products. So, credit cards are, I think, arguably the most complex lending product out there. There's a lot of moving parts and it happens on a daily basis. So, the things you have to figure out really are the big ones are you need to find a good bank sponsor partner. You need to find your processor. You need to find your know your customer vendor or KYC vendor. You need to have a system to be able to originate new accounts. So, a loan origination system is what you're going to need. And you're going to need to have a loan management system to be able to keep track of accounts and calculate interest and process payments. And so that's just a lot of the back-end stuff. And you have to do all the front-end stuff. You have to figure out how you're going to do customer support, customer service, develop mobile apps, develop an application process to be able to allow people to apply. And then down the road, you're going to need to be able to get cards out to them. So, you have to figure out who your card performance is going to have to be. So, you got to figure out how to pull all these things together in a way that makes sense and infrastructure that's actually manageable.

Shawn

Yeah. Yeah, so that's a really long list. So, if I try to narrow that down to maybe the first three things I'm going to do, what's on the startup to do list at the very start?

Scott

Yeah, I would say you're going to need to know your demographics really well. So, if you're building something for younger folks, you know, you're going to want to focus more on a mobile experience. Whereas an older demographic, you're going to want to focus probably more on a website. And then how you kind of present that product to customers is really going to be driven by your demographic. So, I'd say you want to know that off the bat. The second thing I would say is you're going to want to get the right people on the bus at the right time. And by what I mean is when you're starting out, you're not going to need a, an entire team of full-time folks. There's definitely going to be roles where you can use contractors, and then even within those contractors, there's certain kinds of folks that specialize in certain things. So as an example, on the compliance side, you're not going to need day to day compliance monitoring type folks, cause your product hasn't launched, but you are going to need strategic advisors to figure out exactly kind of the infrastructure that you're going to need to configure for your product.

Shawn

Just to cut in, that's one of the things that we see a lot of folks, they go and build out a huge team to start. And it really ramps up the burn when they can least afford it.

Scott

Yeah. Yeah. I mean, I would definitely encourage people to figure out what's the most efficient way and the most short -term way you can get to market, so you can start getting feedback. And that doesn't necessarily mean you have to have a full -time team to start with. The third thing I would say is finding the right vendors, find the right vendors and partners. You really need to invest the time to find folks that you view each other as partners. So you may be the client or they may be the client depending on the relationship, but you really want folks that think like partners. So spend the time to do the due diligence upfront so that you are you're finding folks that mesh with the mission that you're trying to build towards. Related to that, coming up with contracts and coming to an agreements and getting them executed with those vendors they generally are a lot longer than you expect them to be. My rule of thumb is it's probably going to be three times longer than what you expect to get a contractor over the finish line. So you got to factor that in?

Scott

Having a good partner can be really important because you're going to have weird situations that come up and having a good partnership helps you get through them. When I co -founded the prepaid card program, we had a customer who I guess was disgruntled with the IRS and he needed to pay some of his taxes. So, he went to the IRS website and he entered his routing and account number with his account that he had with us. And he would hold down a number key in the...you know in the amount that he wanted to pay. So said he made payments like one penny shy of a billion dollars and he did this repeat. Yeah, exactly. He did this repeatedly to the tune of over 13 billion dollars.

Shawn

Whoa.

Shawn

Wow, that's quite a tax liability.

Scott

Yeah, I don't think he actually owed that much, but he was, I guess, making sure that he didn't underpay. So, you know, the IRS did what the IRS does and they converted those to electronic payments and they submitted them to the, to the NACHA.

Shawn

And just to clarify, Scott, for folks who don't know, NACHA is the National Automated Clearinghouse Association. You may also hear ACH, automated clearinghouse. So that's just the system for processing, you know, what used to be checks and now can be just debits. So, continue.

Scott

Yeah, exactly. So, all those ACHs showed up at our partner banks, Fed operating account, and it took their account negative over $13 billion. So, they weren't legitimate transactions and they ended up getting worked out in the end when the IRS actually tried to collect this money. But we had a great partner bank who helped us kind of work through that. They didn't hold it against us because it wasn't really our fault. And that was because we had a strong partnership with them.

Shawn

That's fantastic. Okay, so as we go back to this, thanks for those first three steps. What is it that you did kind of early on in this project that we started three years ago that you think is really important to replicate for the next time?

Scott

Yeah, one of the things we did was very early on, we created an architectural diagram of kind of all the major components that we felt like we're going to have to put in place to get this program up and live and workable. You know, it had a lot of different pieces to it, but there's some major parts that we already talked about. And the reason why we felt like that was really useful over time was when it came to discussions with potential partners, with new vendors and contractors and with new employees when they came on board, we could talk to them about what it is we were trying to do, how their part fit into the overall conversation and ecosystem. And it was a good tool to be able to bring people up to speed quickly.

Shawn

Yes, I remember looking at that and I guess it was a little overwhelming actually. Because when I think about this, I think you need that origination system, you need a servicing system and you need customer service, which includes the customer facing interface, etc. And somehow on your diagram, those three boxes exploded into a lot more. I don't even remember 12, 13, 14. So I'm just curious, over the last couple of years, we've heard a lot about these BAAS providers, a bunch have sprouted up, a couple of them have gone away. What is it that they do that solves, if you will, the complexity of that architectural diagram that you drew?

Scott

Yeah, so a lot of these BAAS providers and also you'll hear them as credit card as a service providers I don't think there's a great acronym for saying that. What they do is they'll fill out a lot of those boxes with systems and tools that they own and manage in -house so that it becomes less of a burden on the fintech. I think for the right scenario it's a good solution to look at. If you are a company that is looking to broaden the products that you offer to try and maybe deepen your stickiness and relationship with customers, but you don't really care about the economics, those types of programs might be a really good solution for you. The things that you really give up if you go that direction is one is, is there's another third party involved and so therefore the economics gets split up even more. So, they're going to take a chunk of, of the economics of the program.

Shawn

Yeah.

Scott

And two is I think it's inevitable. You're going to lose a little bit of flexibility. Different providers provide different levels of flexibility, but there's going to be some flexibility that you're going to be giving up because you're doing it within their ecosystem.  You know, I'd say those are the two big drawbacks. The other thing too, is, is we hear a lot that, Oh, these are really fast to launch, by going through one of these providers. I think in reality, when you talk to folks who have done this, it's a very mixed experience. We've heard examples of folks who were told they could launch and as quick as say six weeks, eight weeks, and a year later, they still aren't in market.

Shawn

Yeah, and I think we were able to get this product to market in about nine months. If we were to do it again today with what we've learned, how fast do you think we'd be able to do it?

Scott

I think it's very reasonable to say we could get a product to market like this in probably six months.

Shawn

Yeah, so then what are some of the insights or learnings I guess we had in that process that allow us to make it go so much faster the second time around?

Scott

You know, we, we have a much clearer picture on who the short list of vendors are that we would go to. And I, and we've already negotiated contracts before. So, I think getting through that early process is going to be cut probably in half, I would guess. And then on the, on the actual build, you know, having the experience of having gone through it, we have a much better idea on things that we need to choose upfront. You know, the configuration of systems would go a lot faster because we're going to be more familiar with these vendors that we've worked with before.

You know you’re never going to know all the questions you need to ask and you're not going to have enough time to ask all the ones that you should ask, but having a great idea of what the key things are that you're going to need to know upfront, because of these things are going to affect your timeline and being able to get your product to market.  You know, as an example of a small question that wasn't asked upfront when we did this launch was around what bin range was going to be available to us.

Shawn

Yeah, and just again to clarify for folks, like that bin range, that's kind of the first, I don't know, if it's six or seven -ish digits on your credit card specifies what bank and what kind of program it is. So that's what the bin range is.

Scott

Yeah, thanks for clarifying. And so, when we launched this, the entire bin range that we thought was available to our program actually wasn't configured that way. And so, we figured this out through testing and we had to go back and fix it. And it wasn't a big deal, but it took time. I think we lost about two weeks because of this that had to be reconfigured.

Shawn

Yeah, I remember that. I remember I got my card, went out to use it, got declined, which wasn't entirely surprising, right? That's why you do that testing. And then as I recall, we called our processor and said, hey, why'd you decline these? And the processor said, we never saw the transaction. And then we had to go back upstream to Visa. And they said, well, you didn't use a valid number, so we never sent the transaction through.

Scott

Yeah, exactly. Like that's one of those questions that we didn't know we needed to ask because we thought it would have been taken care of and clearly it was a bad assumption. But we got there in the end.

Yeah, I mean to me like that points out a key part of like make sure you build in sufficient time for testing, you know, and I think as a general rule of thumb probably twice as much as you think you're going to need is about the right amount of time.

Shawn

Yeah, what was so crazy about that is that was during supply chain issues and everything. So, I think it took us like three or four weeks actually to get even new plastics to test. And we're just kind of stuck at a standstill. I have to say what is amazing to me about this is, is I think a lot of people go into this space thinking that lending is pretty easy and, and that it's been done for decades in the US, it just seems like it shouldn't be so hard.

You know, there's been hundreds of credit card programs launched by different organizations. It would feel pretty cookie cutter to me at this point, but it, it just isn't. And I don't really know why that is. I do remember when we were interviewing all the loan origination systems and loan management system, we said, “Hey, can you give us your checklist?” And they, they didn't have a checklist for us. We were kind of stuck creating that for ourselves. So, to change speed a little bit, let's talk about fraud. One of my rules is that every new lender is going to get hit with fraud once, twice, maybe even three times. So, what do I do to prepare for that, to prevent that?

Scott

Yeah, you know knock on wood we've been pretty successful at limiting the amount of fraud with this program that we launched, and I think really kind of through some simple steps. I say you don't have to reinvent the wheel. Talk to people that have been in the business awhile. So, talk to you processor. Talk to the network, whether it’s Visa or Mastercard that you work with and talk to your sponsor bank and just ask them like, what are the best practices that they see, you know, across different programs that they already work with and put those in place.

And like, you don't, you don't have to come up with something more clever than that. And then, and then just be prepared to deal with the fact that you are going to have some fraud. I think it's unrealistic to think you're not going to have any, but figure out, how are you going to handle it and how are you going to track it down? And, and what are you going to do about it?

Scott

And then like as your program develops, then you can start looking at other options. There's lots of good vendors out there that have come up over the last few years in the space and figure out which ones might be a good fit to kind of do the next level of fraud prevention for you.

Shawn

Yeah. It's important to remember people committing fraud are in business, uh, essentially, right? So, they're, they're working as hard as you are to prevent it. I agree there's a lot of tools. You know, fraud is kind of a fun space to talk about, at least. I remember way back when I was in fraud at Citibank and their card business, and our investigators brought in some, some plastics that people had created and, and basically manufactured on their own and they had literally used like hologram stickers from CVS instead of whatever it was supposed to be on their visa or the Eagle or whatever it might've been. And that was good enough. Like that got through the system.

Scott

Yeah, we had one interesting story of fraud at the prepaid card startup I was at. There was a customer of ours. She was part of an organized crime group that was figuring out ways to commit fraud. And she legitimately got a prepaid card account with us. I don't know that she ever actually loaded any money on it, but, and then she also did this with other programs as well. So, she got, I think a bunch of these kinds of prepaid cards. And what she would do is, is go from small bank to small bank and credit unions, and she would do teller cash withdrawals. So, she would go up to the teller and say she wanted to do withdraw out of her account. And the account of course didn't have any money on it, but what they had done is they had altered the back of the card to change out what the, they would change out what the customer support phone number was on there, the customer service phone number on the back of the card.

Shawn

How would they do that?

Scott

You know, we never actually saw the example, but apparently it was quite convincing because they got several banks to believe that it was actually the legit phone number. And the way the scam would work is, is, you know, she'd say, Hey, I want to draw X number of dollars out of my account. Of course, the transaction would decline because her account didn't have any money in it. And she would say to the teller like, Oh, this must be, I think this is over my daily, withdrawal limit. And, you know, I think we can call the customer support number and they can raise my daily withdrawal limit. And she would say, yeah, here's my card. You can call the phone number on the back of the card. So that's what the teller would do. And, you know, unbeknownst to them, they were calling an accomplice who would, you know, make tapping noises on a keyboard and give them a transaction confirmation number, and then walk the teller through how to override their own system to approve the transaction.

Shawn

Nice.

Scott

Yeah. So, this went on for a while and we told our sponsor bank and you the FBI got involved and one of these cards that was being used for the scam was used to buy some NFL tickets. So, the FBI knew when and where these people were going to be, and they met them at their seats at that NFL game. It would have been awesome to see.

Shawn

That is fantastic. That must've been fun for the FBI agents as well.

Scott

Yeah.

Shawn

Yeah, when we started Zest Finance, now Zest AI, we talked to every customer and all of us who worked there were kind of customer service agents. And I remember our first big fraud ring we caught because I talked to the same woman twice in one day. And so we went through the list, and I remember she was out of South Dakota, and we were able to connect about 20 approved transactions to this one woman in that one day. And fortunately, we were able to get to it before we sent out the money. So, we ended up not losing anything. But what it really educated us on is to look for kind of anomalies, you know, 20 accounts for us in a day was actually a really good day. So, what looked like at one point a really good day could have turned into a really bad day. And so finding this pattern that we had an unusual amount of applications from South Dakota, and then also doing what we refer to now as chaining, which is she had used the same phone number on applications one and two, and the same email on applications two or three. So, we were able to kind of string together a bunch of data points and connect those 20 applications. So, to summarize on that, you're going to have some fraud. As much as you can use kind of the off -the -shelf defense tools and also build some of that kind of anomaly detection, and I think that's probably the best way to prevent it in the early days at least. So, to wrap up here, what is the one piece of advice that you would give to other FinTech startups looking to start a lending business?

Scott

Yeah. I mean, I think the one thing that's, think, got to be clear upfront when you're starting one of these businesses, what's your path to profitability? You're not going to get there, you know, initially, or maybe for the first few years, and maybe you have to have runway to be able to get to that point. But like it's, it's over the last 15 years, I feel like we've seen. Fintechs come and go who you look at them and you wonder like, where is the chance for this company to ever be profitable? And so, like, just be clear on that. If, if you're going to invest the time and the money and, you years of your life to do this, like make sure you have a clear way of actually get to that point.

Shawn

Yeah, I think that's a great point. We see lots of organizations that they really don't have a business model that is ultimately viable, and many of them are very well intentioned and we really appreciate that. But you do have to have a path. So, I think that's great advice. Well, thank you so much for joining me today, Scott.

Scott

Yeah, thanks for having me on. This has been really great.

Shawn

You can find Scott on Linkedin as well. You can also find out more about Ensemblex on Ensemblex.com. That’s Ensemble X dot com. Of course you can look us up on Linkedin as well and you can find the Ensemblex Exchange Podcast on all major platforms. Thank you for listening.